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Retirement Investing in Real Estate: New Opportunities

January 18 | 2017

Retirement investing today offers a great deal more freedom and choices for investors than it ever has. Whereas historically most individuals invested their IRAs, 401(k)s and other qualified retirement accounts in traditional vehicles such as stocks, bonds, mutual funds and Treasury notes, today investors can use their retirement accounts to invest in a number of other types of assets.

One of the most popular non-traditional asset classes for retirement investing is real estate. Many investors view real estate’s potential for long-term appreciation, combined with the tax advantages of a qualified retirement plan, as potential reasons to invest their retirement accounts in real estate.

This page will discuss several of the ways individual investors can use their personal retirement accounts to invest in real estate, as well as the potential benefits and risks involved.

How Can I Use My Retirement Account to Invest in Real Estate?

Retirement investing in real estate is a broad concept that can involve many types of investment vehicles, varying amounts of risk, and different degrees of involvement required on the part of the investor. Here are a few examples.

This is the most common way of using a personal retirement account to invest in real estate.

If you own an IRA, you can simply use your account to purchase equity shares (or debt shares, by buying bonds) of real estate-related businesses. These could be publicly traded real estate development companies or mortgage companies, for example, or mutual funds or publicly traded REITs (real estate investment trusts) that are themselves invested in a basket of real estate businesses.

If you have a 401(k) through an employer, you might also be able to find real estate-related investment opportunities such as these in your plan’s available offerings. Generally speaking, however, an employer-sponsored 401(k) can have a more limited range of investment opportunities for you to choose from than your personal IRA might have.

With that in mind, if you have a 401(k) with your employer and cannot find the right real estate-related investments for your retirement account, you can also open an IRA — either a traditional IRA or a Roth IRA — and find real estate investments through that account. But you will need to do your due diligence first, because there are limits on an IRA that you hold if you also maintain a 401(k), and you will want to learn about the tax implications of owning both retirement accounts simultaneously as well.

This is the most passive and straightforward way to invest your retirement account in real estate. In essence, you can simply find stocks, bonds or mutual funds to purchase, just as you would with other types of traditional retirement investing. The only difference, in this case, would be that you have chosen real estate as the industry in which to invest.

You can (in some cases) invest your retirement account directly in a piece of real estate

This is a far more active — and risky — means of using your retirement account to invest in real estate. But if you know what you are doing, and you’ve thoroughly researched the laws, restrictions and tax implications, it is also a potentially lucrative way to grow your retirement nest egg.

First, it is important to understand that although investing IRA funds directly in a piece of property is entirely legal, many IRA administrators will not allow such investments. If you’ve opened an IRA with a financial-services company that does not allow direct real estate investing, you might want to find a new plan — typically called a self directed IRA — that allows such investments.

Another option for you might be a Solo 401(k) — a personal retirement account for individuals with single-person businesses or consulting practices and with no employees. If this describes you, you might also consider opening a Solo 401(k), which can allow you to use your account to purchase real property directly.

Next, you’ll need to know the limitations of direct real estate investments through your IRA or Solo 401(k). For example, the IRS’s Prohibited Transactions Rules prevent what the tax agency calls “self-dealing.” This means if you purchase a home or office through your plan and then rent it out to a family member, employee or yourself, you might be hit with taxes or other penalties. When you purchase property through one of these qualified retirement plans, then, you need to be sure that neither you nor those close to you are ever involved on the other side of the deal. In other words, you will want to keep all transactions relating to this real estate — who’s occupying the property, who’s paying the rent, who’s guaranteeing the mortgage, etc. — at arm’s length, meaning not involving people in your immediate social or professional circles.

There are also other potential pitfalls that can ensnare an investor who purchases real estate through an IRA or Solo 401(k). For example, if the property must be sold during a time in which the real estate market is down — because, for example, you have reached the age of your plan’s required minimum distribution (RMD) — you might have to sell the property for less than you had hoped for.

Another key issue here is that, when you purchase a property through a retirement account, all of the business income, such as rent, that the property earns will need to be deposited directly back into the retirement account itself. If you take any of that income out and put it in your own bank account, it will be subject to taxation and possibly some hefty penalties as well.

For these reasons, although investing your IRA or Solo 401(k) directly in a piece of real estate has historically had potential for returns over time, you will need to thoroughly research this type of investment and learn about the restrictions, tax issues, and risks before making such a move.

You can (in some cases) borrow against your IRA or 401(k) to invest directly in a piece of real estate

Some retirement plans, including Solo 401(k)s and some of the standard, employer-sponsored 401(k) plans, allow account holders to borrow money from their retirement accounts and then use these funds to purchase real estate.

Keep in mind that in such a case the real estate itself is not held inside the retirement account — which means it won’t be enjoying the tax-deferred earnings benefits that the plan provides. The potential benefit here would simply be that the investor could tap the funds in the account and — provided she pays the loan back according to the plan’s schedule — enjoy access to that investment money without tax or penalty.

There is, of course, substantial risk here as well. Owning an individual piece of real estate requires active attention to the property and carries the risk of loss — loss of tenants, property damage, loss of equity in a down market, etc.

Moreover, if you were to use your employer’s 401(k) plan to borrow the money to purchase a piece of property, you could face an additional risk — a significant one. Assuming you took out a mortgage to buy the property, if you lost your job, your entire outstanding mortgage balance might come due immediately.

For these reasons, you will need to conduct thorough research and educate yourself on all of the tax implications, legal ramifications, and financial risks before borrowing against your retirement account to fund a real estate investment.

This is among the newest and most innovative ways to invest directly in real estate using your retirement account. And in a sense, it has the potential to provide you with aspects of both passive and active real estate investing.

With the right crowdfunding platform, for example, you can make equity or debt investments directly in specific commercial properties — thoroughly vetted by a team of real estate and finance experts — and participate in the possible upside of those deals. These might be industrial or retail properties, or large apartment or condominium complexes. You can also search for the most attractive individual deals for you by geographical region or even by stage of completion. In other words, rather than investing in a publicly traded real estate mutual fund — itself spread across hundreds or thousands of real estate businesses — you can invest directly in a single, large-scale commercial real estate deal.

At the same time, you will be able to make this direct investment in property without any of the active, hands-on work required for traditional real estate ownership. You won’t be responsible for the tenants, the upkeep or maintaining the books — that will all be managed by the owners and experts.

In other words, this can be simultaneously a direct, passive investment in commercial real estate. As with all types of investment you will need to thoroughly research this type of investment and learn about the restrictions, tax issues, and risks before making such an investment.

This new form of retirement investing in real estate is another way that you as an individual investor can gain access to a non-public real estate opportunity that you might not otherwise be able to.

In early 2017, RealtyMogul began accepting retirement funds from self-directed IRAs into the company’s online, income-producing REIT, called MogulREIT I.

With as little as a $1,000 investment through your qualified IRA, you can now invest in commercial real estate and enjoy the potential for both passive incomes accumulating in your retirement account. You can also automatically reinvest your dividends back into MogulREIT, thereby offering the possibility of compounded returns over time.

Additionally, RealtyMogul can also accept rollover funds from your existing retirement plan and serve as the custodian of record for your new IRA, to be invested in MogulREIT I. This service will be free of fees for the first year and will require only a $10,000 minimum investment. Keep in mind there are risks to investing in the MogulREIT so it is important to review the full offering materials.